RH Form 10-K Summary
Reporting period: Fiscal year ended February 1, 2020, consisting of 52 weeks. The request metadata references “2018 Q4,” but the supplied filing is RH’s fiscal 2019 Form 10-K, including quarterly data through the fourth quarter ended February 1, 2020.
Business Context
RH is a luxury home furnishings retailer operating integrated Galleries, outlets, Source Books, websites, Trade and Contract channels, RH Hospitality locations, and Waterworks showrooms. At year-end, RH operated 68 Galleries, 38 outlet stores, and 15 Waterworks showrooms. The company had approximately 5,100 employees and sourced approximately 70% of products from Asia, including approximately 38% from China.
Financial Performance and Key Metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Net revenues | $2.647 billion | $2.506 billion | Up 5.7% |
| Gross profit | $1.095 billion | $986 million | Up 11.1% |
| Gross margin | 41.4% | 39.3% | Up 210 basis points |
| Income from operations | $362.8 million | $261.7 million | Up 38.6% |
| Operating margin | 13.7% | 10.4% | Up 330 basis points |
| Net income | $220.4 million | $135.7 million | Up 62.4% |
| Diluted EPS | $9.07 | $5.12 | Up 77.1% |
| Adjusted EBITDA | $495.4 million | $400.1 million | Up 23.8% |
| Free cash flow | $330.4 million | $162.7 million | Up 103.0% |
Fiscal 2019 net revenue growth was driven primarily by existing Galleries, increased selling square footage from new Galleries, RH Hospitality, Contract, and higher outlet sales. Furniture revenue increased to $1.794 billion from $1.626 billion, while non-furniture revenue declined to $853.1 million from $880.1 million.
Net cash provided by operating activities was $339.2 million, compared with $249.6 million in fiscal 2018. Capital expenditures were $93.6 million, and adjusted net capital expenditures were $157.9 million, inclusive of landlord tenant allowances. Cash and cash equivalents were $47.7 million at year-end.
Total debt, including the current portion and net of applicable discounts, was $954.9 million at February 1, 2020, compared with $947.9 million at February 2, 2019. The debt consisted principally of $300 million of convertible notes due July 2020, $335 million due June 2023, and $350 million due September 2024. RH had no outstanding borrowings under its revolving credit facility and reported $321.7 million of borrowing-base availability, net of $13.2 million in letters of credit.
Fourth-Quarter Results
Fourth-quarter fiscal 2019 net revenue was $665.0 million, compared with $670.9 million in the fourth quarter of fiscal 2018. Gross profit was $283.1 million versus $257.9 million, and net income was $68.4 million versus $27.3 million. Adjusted EBITDA was $145.0 million versus $131.5 million.
Fourth-quarter revenue was adversely affected by higher-than-expected customer backorders, lower inventory, the elimination of most seasonal holiday merchandise, and lower prior-period outlet and warehouse sales associated with inventory optimization. Product delivery delays also resulted from insufficient inventory and slow factory ramp-ups.
Material Changes Versus the Prior Comparable Period
- Revenue increased 5.7%, while gross profit increased 11.1%, reflecting merchandise-margin improvement, distribution-center efficiencies, delivery-cost reductions, and occupancy leverage.
- Operating income increased substantially, despite higher interest expense and $6.5 million of net loss on debt extinguishment.
- Interest expense increased to $87.2 million from $67.8 million, primarily due to higher convertible-note discount amortization, finance-lease interest, and term-loan costs.
- RH issued $350 million of 0.00% convertible senior notes due 2024 and repaid a $200 million second-lien term loan and a $120 million FILO term loan.
- RH repurchased approximately 2.2 million shares for $250 million during fiscal 2019. The remaining authorization under the repurchase program was $450 million at year-end.
- Inventory declined to $438.7 million from $531.9 million, contributing to operating cash flow but increasing backorder risk.
- Fiscal 2019 had no goodwill or tradename impairment, compared with $32.1 million of Waterworks goodwill and tradename impairment in fiscal 2018.
- RH adopted the new lease standard using a modified retrospective approach, materially increasing reported lease assets and liabilities. The company also revised prior-period financial statements for immaterial lease-accounting and cash-flow errors.
Guidance, Outlook, Risks, and Unusual Items
- RH withdrew all prior fiscal 2020 guidance and outlook because of the COVID-19 pandemic.
- Effective March 17, 2020, RH temporarily closed its retail locations for an indeterminate period. Management expects an unfavorable impact on fiscal 2020 sales, earnings, and cash flows.
- As of March 27, 2020, RH had $35.0 million of borrowings under its asset-based credit facility and $307.9 million of borrowing-base availability, net of letters of credit.
- Management planned to preserve cash by reducing workforce costs, delaying capital expenditures and new business introductions, adjusting Source Book circulation, and minimizing discretionary spending.
- RH expected to repay the $300 million principal amount of convertible notes due July 2020 in cash, creating a significant near-term liquidity requirement.
- Key operating risks include discretionary luxury spending, high-end housing and stock-market conditions, COVID-19 disruptions, supply-chain concentration in Asia and China, tariffs, inventory availability, long-term lease obligations, and reliance on third-party vendors.
- Legal matters included a securities class-action settlement funded entirely by insurance and a shareholder derivative case with an agreement in principle to settle, also expected to be funded by insurance.
- Fiscal 2019 included $21.9 million of asset impairment and lease-loss adjustments, $1.1 million of reorganization costs, a $3.99 million favorable recall adjustment, a $1.5 million gain on assets held for sale, and $1.2 million of favorable legal settlements.
- RH reported effective disclosure controls and effective internal control over financial reporting as of February 1, 2020. The independent auditor issued an unqualified opinion but emphasized the COVID-19 subsequent event.
Most Important Facts for Investors to Verify
- Whether COVID-19 store closures, reduced traffic, supply-chain constraints, and changes in consumer behavior materially reduce fiscal 2020 revenue and cash flow.
- RH’s ability to fund or refinance the $300 million convertible-note maturity in July 2020 while maintaining sufficient working capital.
- Actual borrowing-base availability, covenant compliance, and any amendments or waivers under the asset-based credit facility.
- Whether inventory reductions improve cash conversion without causing sustained backorders, lost sales, or additional markdowns.
- The sustainability of fiscal 2019 gross-margin and operating-margin gains after accounting for unusual items and changes in product, outlet, and hospitality mix.
- Progress, required capital, and returns from new Design Galleries, international expansion, RH Hospitality, RH Guesthouse, and the multi-tier real-estate strategy.
- Potential dilution or cash requirements from the 2020, 2023, and 2024 convertible notes, including warrant exposure above their stated strike prices.
- Future product recalls, litigation outcomes, tariff changes, Waterworks performance, and potential impairment charges.